The Monetary Policy Committee of the Reserve Bank of India today cut the benchmark repo rate by 25 bps. With this rate cut, the repo rate will stand at 6%.
The expectation of a rate cut has been based on a lower inflation rate as well as slower growth in the economy. The consumer price index-based inflation has remained within the RBI’s 4% target for over 6 months and is further expected to remain within the target range at least for the next few months. Moreover, the domestic economic growth has also been subdued.
How does this change in the repo rate impact depositors? We explain.
As a depositor, a falling interest rate means that the new deposits you make earn a lower rate and it means lower returns. The fixed or term deposits booked at a higher rate continue to give the higher return till the time of maturity.
With the cut in repo rate, banks are expected to reduce their fixed deposit rates in the coming days. However, the reduction in deposit rates might not be proportional to the cut in repo rate. This is due to the fact that the credit growth in the economy in the past year has been higher than the growth in deposits. So in order to be able to lend, banks also need to attract depositors. Accordingly, the reduction in deposit rates might not be proportional to the repo rate cut.
However, State Bank of India had recently announced linking its savings deposits of over ₹1 lakh directly with the repo rate from 1 May. So the rate for such depositors is expected to come down proportionately.